What is Common stock? Definition, Formula & Benchmarks

What is common stock?

Common stock is the basic ownership share class held by founders, employees, and advisors, usually through options. It carries voting rights but sits at the bottom of the payout stack, behind preferred shareholders and creditors, in any exit or liquidation. Its fair market value, set by a 409A, determines option strike prices.

Worked example

Founders and employees hold common stock; in an acquisition, they're paid only after preferred investors collect their liquidation preferences off the top.

Why it matters for fast-growing companies

Common stock is what founders and employees actually own, and it's last in line at exit, so the size of the preference stack ahead of it directly determines their take. Understanding where common sits, and negotiating to keep preferences reasonable (1x non-participating), protects the value of everyone building the company.

Frequently asked questions

What's the difference between common and preferred stock?+

Common is owned by founders and employees; preferred by investors. Preferred carries a liquidation preference, anti-dilution protection, and often board or veto rights, and gets paid first in an exit. Common has voting rights but sits last in the payout stack. The gap in their value is what a 409A measures.

Why do employees get common stock instead of preferred?+

Preferred is reserved for investors who negotiate for its protections in exchange for their capital. Employees receive common, usually via options, which is simpler and priced off the 409A fair market value, giving low strike prices. The tradeoff: common ranks behind preferred, so it pays out last in an exit.

Common stock